As Apple starts selling its new smart watch there are some, well, crazy-sounding predictions circulating about the amounts of gold the company might soon be buying. The math goes like this: Each gold version of the watch will contain around two ounces, and the company might sell 10 million of them a year, mainly to rich, tech-savvy Asians.

That would be 20 million ounces a year, at 29,000 ounces per ton, which comes to around 700 tons. Since the world’s gold mines produce maybe 2,500 tons per year, Apple would, with the introduction of this one product, buy more than fourth of global production and would jump to number three on the gold consumption list, behind only India and China. Pretty amazing, and on the surface extraordinarily good for gold prices.

But Apple of course is just the middle man. It’s buying gold, turning it into jewelry and selling it. So the buyer of the watch is really the gold consumer. And here you get into some overlap. Since Chinese and Indians already buy a lot of gold in the form of jewelry and bullion, will iWatch buying crowd out this other demand, or will it be coming from different groups within these societies?

In India, for instance, will an iWatch be an acceptable wedding gift instead of traditional gold jewelry? And, assuming that some buyers are people of means who might otherwise have considered different gold watches, how much of the new demand is just substitution within an already existing market?

It will take a couple of years to find the answers, but in the meantime it’s safe to hazard a general guess:

Some purchases of iWatches will replace other gold buying, but not all. The market for this kind of technology skews way younger than for traditional jewelry or luxury watches. The small screen alone argues for young eyes. So the iWatch won’t be seen as a form of savings but as something to be used and flashed around daily — and then traded in for even cooler tech a few years hence.

In other words, even if the level of substitution turns out to be very high, it won’t be 100%. So “luxury wearable tech” is definitely a net plus for gold. The question is how big a plus.

The world is full of “carry trades” these days, and that’s a really bad thing.

In general terms, a carry trade involves someone borrowing money cheaply in one currency or market and investing the proceeds in something else that offers a higher yield. The strategy is profitable as long as the currency being borrowed doesn’t rise by more than the spread between the cost of the loan and the income from the investment.

The yen carry trade, in which institutions borrowed Japanese yen for next to nothing and bought emerging market bonds yielding quite a bit more, was the dominant version for most of the past decade. It paid off nicely when the yen plunged in value last year. Then the dollar carry trade took over, with about US$9 trillion being borrowed worldwide and invested in everything from Brazilian bonds to Chinese infrastructure. That hasn’t worked out so well, since the dollar is up lately by more than enough to offset the income from those investments. The impact of this tidal wave of negative cash flow will be felt going forward and could be serious, since $9 trillion is about the size of the Chinese economy.

But the really interesting — and potentially even more dangerous — carry trade is happening here at home, where public companies are issuing low-interest-rate debt and using the proceeds to buy back their shares. When the bond interest is lower than the dividends on the stock that’s being purchased and retired, this is a cash flow positive trade — with the added benefit of pushing up the share price and therefore company execs’ year-end bonuses. Check out the following two charts for a sense of the magnitude of this trade:

So what happens if US equities have the kind of bear market that usually follows their recent spike to record levels? Well, the companies that have borrowed heavily will still owe interest on their bonds, but the shares they’ve bought will be worth 20%-30% less. This negative change in their net worth (real if not in terms of financial reporting) might make their shares even less attractive and put extra downward pressure on them, and so on, until a garden-variety bear market turns into something nastier.

This in turn will throw the “wealth effect” (in which higher share prices lead to higher consumer spending) into reverse, possibly turning a manageable slowdown into another Great Recession.

That’s of course unacceptable for the people running today’s governments, for whom rising asset prices are now up there with the war on terror and lobbyist pay scales in terms of untouchability. So lately even minor stock price corrections have been met with an army of Fed, Treasury and congressional talking heads promising fast action to keep the gravy train going.

All of which makes current speculation about Fed interest rate policy seem a bit silly. The truth of the matter is that interest rates, monetary policy in general and pretty much every other government policy is now dictated by the need to keep the asset bubble from bursting.

Business Insider’s Myles Udland just posted a chart, drawn from research by the Bank of England, showing interest rates for the past 3,000 years. And for all those who’ve been feeling like today’s “new normal” is actually profoundly abnormal, here’s your proof. It turns out that interest rates, both long and short-term, are lower than they’ve ever been. Not lower than in this cycle, or post-war or in the past century, but ever, going back to the earliest days of markets.

And they’re still falling in most of the world. Central banks are cutting rates on a daily basis (Turkey was today’s announcement), in some cases to less than zero. Something like $2 trillion of sovereign and corporate debt now trades with negative yields.

If this is indeed uncharted territory and we’re going further in before we’re done, what are the implications for markets and, well, everything? A couple of thoughts:

The insurance industry, pension funds and money market funds all depend on positive yields to operate. A life insurance company, for instance, can keep premiums low because it can invest that cash for years before having to pay out on the policy. What happens if the bonds it buys start yielding nothing (or less than nothing)? What about a money market fund that can no longer find investment grade corporate paper yielding much more than zero? Pension funds, meanwhile, have generally promised 7%-8% returns to their members, but now have to get all of those profits from the equity and real estate sides of their portfolios.

For any of these entities to stay in business they now have to act like hedge funds, taking on extra risk, rolling the dice and hoping that the good years outweigh the bad ones. In other words, these formerly safest-of-the-safe investment vehicles become just as risky as the typical eTrade account.

Then there’s the impact of negative rates on the market’s price signaling mechanism for the rest of us. Interest rates are the price of money, and as such they tell investors, entrepreneurs and consumers what to do. Low interest rates generally say “buy, build, consume, take risks” while high rates say “save, sell, conserve, wait.” But zero or negative rates? Are they just an extreme version of low rates or is there a qualitative difference? Everyone has a theory about this but in the absence of historical precedent, we’ll have to wait and see.

Anyhow, the coming negative interest rate world will provide plenty of thrills, chills and blog post material. For now it’s enough to note that we’ve never, through depressions, world wars, bubbles and famines, seen anything like today’s economy.

Today’s existing home sales report was down another 4.9% to an annual rate of 4.82 million units, the lowest in nearly a year. And this, remember, is in the sixth year of a recovery with reported unemployment below 6% and the Fed preparing to raise interest rates to head off incipient overheating.

Mortgage rates can’t be the problem, since they’re down lately to less than 4% on a 30-year fixed loan. That’s amazingly cheap, especially to people of a certain age who remember when 7% was a really good deal. In normal times a rate this low would set off a buying frenzy. This year it can’t even keep demand steady.

The real problem has nothing to do with housing per se and everything to do with that fraudulently false unemployment number. The truth of the labor market is that 1) most of the new jobs being created are either part-time or low-wage or both and therefore can’t support a mortgage, and 2) most of the improvement in unemployment comes from people dropping out of the workfore and no longer being counted as unemployed. These people also generally can’t get or don’t want mortgages. Meanwhile, the relative handful of Americans who do qualify for loans seem to be choosing cars and college degrees over houses.

And the US, remember, is the global success story. We monetized our debt first and fastest and are now reaping the rewards. But with the rest of the world flat-lining or worse (result: falling profits for US multinationals), the oil sector contracting (result: layoffs in once-booming Texas and the Dakotas), and now housing a net negative with no recovery in sight (result: layoffs of highly-paid appraisers and mortgage bankers), the odds of the Fed raising rates anytime soon are becoming more and more remote.

Much more likely is the US joining the race to negative rates. Somewhere down there must be a mortgage rate (1%…-1%?) that gets us buying again.

Confounded Interestjust posted a nice summary of a McKinsey report on the growth of global debt during what some persist in calling the “great deleveraging.” Turns out that since the crisis of 2008, debt has actually risen by $57 trillion, and the ratio of debt to GDP is up 17 percentage points to 286%. Meanwhile, central banks are monetizing 100% of newly-issued sovereign debt.

The obvious response to this is 1) wow, nothing has been fixed; in fact just the opposite, and 2) these stats, horrendous as they are, are incomplete because they don’t include unfunded liabilities of governments and private pensions, which are just as real as any other kind of debt.

But unfunded liabilities must be getting better, what with the stocks and bonds in pension fund portfolios soaring lately. Right? Since that’s an effortless Google search, that’s what I did. And the results were both counterintuitive and scary. It seems that even with pension fund investment portfolios booming, obligations to future retirees are rising even faster, making these entities even more underfunded today than in 2007. Here’s a sampling of the headlines just from February, in the order they appear in the search window:

Now, easy money advocates argue that the solution to this and all other unbalanced economic equations is to borrow and spend enough new cash to get asset prices up and put people back to work. But stocks and bonds are currently at record highs and the unemployment rate is below 6% (peak-of-the-cycle kinds of numbers that have historically preceded corrections in which investment returns and tax receipts both plunge, raising unfunded liabilities).

So it looks like we’ve thrown our best punch and the problem is still standing there, wondering if that’s all we’ve got. Which leaves the US and the rest of the world — where debt and unfunded liabilities also continue to rise — with the question: If debt was the thing that nearly destroyed the global financial system in 2008 and debt — both narrowly and broadly defined — is way up since then, what happens in the next downturn? The answer is who knows, because this is uncharted territory both in terms of the size of the imbalances and governments’ policy responses.

The only thing that’s certain is that there are more cities, states and related pension funds poised to blow up than ever before.

During a 2011 congressional banking subcommittee hearing, Texas congressman Ron Paul asked Federal Reserve Chairman Ben Bernanke if gold is money. “No,” replied Bernanke, “It’s an asset.” Video of this exchange went viral in the gold-bug community, because the difference between money and an asset is, to people who care about such things, both profound and crucial to the future of the global financial system.

The subtext of the Paul/Bernanke exchange was a slightly different but equally important question: Can a government simply decree that what has functioned as money for 5,000 years no longer be money? This question has been debated in various forms and forums since the first government began debasing its currency eons ago. But the modern iteration can be traced back to the Great Depression. Recall that at the time the US was on a gold standard, and a paper dollar was simply a warehouse receipt for 23.222 grains of gold (approximately 1/20th of a troy ounce), while a dollar in a bank account was in theory exchangeable for those paper receipts (dollar bills). But because the Federal Reserve issued up to 2½-times more receipts than gold and because banks operated on a fractional reserve system, the total quantity of claims vastly outnumbered the weight of gold held in reserve.

After the 1929 stock market crash, the fractional reserve system began working in reverse (see Chapter 15), leaving the US – and much of the global – economy on the verge of imploding.

For countries on the gold standard, currency devaluation was seen as an admission of failure and deemed dishonorable because it allowed a country to pay off its debts in currency that had less purchasing power than at the time the loans were made. Nevertheless, devaluation was grudgingly accepted as last-ditch strategy for badly-run countries to boost economic growth and avoid a depression or more direct form of default.

The US, as it turned out, chose to both devalue its currency and default on its debts. Shortly after his inauguration in 1933, President Franklin Roosevelt concluded that US problems were serious enough to warrant devaluation of the dollar, among other aggressive policies. Under Article I, Section 8 of the Constitution, only Congress had the power to “regulate”6 the relationship between the dollar and gold, but FDR claimed that authority for the presidency. And instead of simply decreeing that henceforth the dollar was worth less gold than before, FDR first confiscated Americans’ privately-held gold and made it illegal to own the metal – and then devalued the dollar against gold, effectively taking the difference between the purchasing power of the gold citizens turned in and the dollars they received in return. This was, to put it bluntly, theft. It was also a partial default on US debt, much of which carried “Gold Clause” provisions specifying that it was payable in specific weights of gold.

The implications of FDR’s actions, however, went far beyond a garden-variety asset confiscation or currency devaluation. By making gold ownership illegal, FDR was asserting the primacy of government over the market in deciding what constitutes money. In the process, it made the right of private contract – a fundamental pillar of law heretofore considered sacrosanct – subservient to the government’s conception of the “national interest.”

By lifting the restraint that sound money places on federal spending, FDR fundamentally altered the relationship between Americans and their government. Previously, governments could borrow modestly (by today’s standards) but for the most part could spend only the money that they had on hand. Money was gold, and the coins and bars in the national treasury helped define the government’s wealth while limiting its ability to promise all things for all constituencies. In the future FDR created, governments would be free to act as they saw fit, simply creating a desired amount of paper fiat currency and spending it to make the world a better place – as defined by the people in charge. Perhaps FDR’s goal was the public good rather than what is now often called an “imperial presidency.” But regardless of his intent or motivation, as the brief tour of monetary history in Chapter 1 makes clear, a government with a printing press is a monster in the making.

Minutes ago, eurozone finance ministers announced that they’ve agreed to give Greece four months of breathing room in which to get its financial house in order. In that time, Greece will either work out a debt restructuring with its creditors or create a fully-functioning economy capable of managing the developed world’s second highest ratio of government debt-to-GDP.

And they’ll do these things while increasing the number of public sector jobs and limiting the privatization of public assets. More bureaucrats, richer pensions, stricter labor laws… this is straight out of French president Francois Hollande’s playbook, which in turn was cribbed from a long line of European social democrats. All of whom, it shouldn’t be necessary to point out, failed miserably for a pretty basic reason: after government reaches a certain size, making it bigger is a net negative. That is, it costs more than it produces so the country gets poorer. A shrinking pie doesn’t allow major constituencies to keep what they have, everyone starts squabbling, the place becomes ungovernable and the architects of the plan get shown the door.

Giving the Greek left four months in which to formulate a new economic policy — without a currency that it can devalue — is just giving the global financial markets a vacation from this particular worry. Vacations by definition have to end, so come June Greece and the rest of the eurozone will be right back where they were yesterday, though with even more debt.

So the questions become:

How can a government hire more people and tighten regulations while simultaneously paying off debt? The answer is that it can’t. The two are mutually exclusive in the short run, and four months is the shortest of short runs in the realm of fiscal policy.

Why would a Greek citizen keep euros in a Greek bank, knowing that 1) the crisis will return in a mere four months and 2) the main tool for fixing the country’s finances is aggressively stepped-up tax collection, which means they’re coming for your money one way or another? The answer is that they wouldn’t. A few months of breathing room just gives savers a chance to get out in a leisurely rather than panicked way.

There simply isn’t a political fix for this much debt. And though delaying the day of reckoning has worked beautifully for stock market investors and incumbent politicians it has also allowed the developed world to dig itself an even deeper financial hole.

So Greece and the rest of the eurozone now get another four months to borrow, spend and hope for the best, while “the best” recedes further towards the horizon until all that’s left is a menu of really painful options. It’s not a surprise that putting them off is easier than facing them head-on.

The euro’s fatal flaw was always people. The fact that most eurozone countries are at least nominally democratic and keep having elections means that the more complicated and draconian the process of merging them into one entity ruled by unelected bureaucrats in Brussels becomes, the harder it is to elect people at the national level who want to keep going.

Greece is an obvious example, and will provide some thrills and chills as its debt negotiations lurch to the inevitable extend-and-pretend resolution. But much bigger things are brewing as the euro’s issues bite other constituencies in other ways.

In Italy, for instance, the new government recognizes that the country’s only chance of functioning under a stable currency is to make serious reforms in pretty much every corner of the economy, especially its almost child-like labor laws. Here’s a brief overview of those laws from the National Center For Policy Analysis:

• Cassa Integrazione Guadagni is a scheme that allows Italian businesses who need to shave their workforce to put a worker on “standby” rather than fire him outright. The government will pay the worker a large portion of his lost salary until he is rehired. Such a program keeps workers from moving to new jobs while businesses struggle to compete.

• Firing a worker in Italy for poor performance is incredibly difficult, and employers have to convince a judge that there is no alternative option available to the employer short of firing the worker. These hearings can take months, and litigation is not cheap.

• According to the World Economic Forum, Italy ranked 141st out of 144 countries in terms of its hiring and firing practices.

• Italian unions are stubborn, and businesses — in order to avoid having to negotiate with them — stay small. Of all the countries in the European Union, Italy has the largest number of small businesses because companies are concerned about what growth would mean in terms of union negotiations.

For Germans the situation is a little different because they until recently have benefited from being able to sell things to the big-borrowing eurozone periphery. But now the debt thus created is looking like it will have to be covered by German taxpayers, and they’re starting to regret their past decisions. See Angela Merkel’s conservatives suffer worst election result since WWII.

So here’s a modest prediction. After a bit more brinksmanship, Greece gets an extension and disappears from the headlines for a while. Then the focus shifts to the eurozone’s real threats, which are the bigger countries where anti-euro forces on both left and right are gaining popularity. With Podemos (Spain, radical left) and National Front (France, radical right) now leading in opinion polls, sitting politicians will start doing all kinds of crazy things to keep their jobs. Negative interest rates will spread, debt monetization will expand, and the euro will get even weaker.

Then Greece will resurface, having failed to transform itself into a fully-functioning capitalist economy, and the whole thing will start again. But from an even more precarious place.

Global capital is looking for a place to hide. But after decades of enthusiastic currency creation and financial engineering, there’s way too much of it for any one country to accommodate. This mismatch between money knocking at the door and available space is leading the handful of remaining safe havens to put up “no vacancy” signs in order to avoid being swamped. Among the things they’re trying is negative interest rates. That is, if you want to deposit money in a Swiss or Danish bank or lend money to the Japanese or German governments you now have to pay them for the privilege.

This sounds a little crazy, and from a historical perspective it is indeed highly unusual. But it’s exactly what you’d expect in a world of ever-increasing debt and ever-more-exotic financial speculation: Too much bad paper gets created which eventually blows up, causes instability and leads worried investors to value return of capital over return on capital. They all pile into whatever seems most likely to still exist a decade hence, forcing (or enabling) the managers of those assets to charge rather than pay interest. Here’s a sampling of recent stories on the subject:

Now, there are lots of interesting sub-topics to explore in a world of negative interest rates. But let’s start with the role of gold. Traditionally the ultimate safe haven, it is the one form of money that can’t be messed with and therefore the place to be when the messing gets out of hand.

Lately, for instance, it has spiked in countries with emerging currency crises. In Russia, Argentina, Greece and in fact the entire eurozone, the local-currency price of gold has risen faster even than the exchange rate of safe haven currencies like the US dollar and Swiss franc. And with interest rates going negative in much of the world, a person with capital to allocate confronts a new and very interesting risk/return calculus. Consider:

On a cash flow basis, gold sitting in a vault actually costs money in the form of storage fees. In normal times — back when government bonds and bank deposits yielded, say, 6% — the spread in favor of the bond and against gold was pretty compelling. But what happens when interest rates go negative, so that the cash cost of owing gold and government bonds is pretty much the same at around 1% a year? Now our hypothetical capital allocator has to ask some new questions. Among them: Has a fiat currency ever had a sustained period of rising value? That is, has there ever been deflation for more than just a short while in a system where a central bank could create unlimited amounts of currency? The answer is no, for an obvious reason: Deflation is bad for sitting politicians because it makes both government and business debts harder to manage and therefore elections harder to win.

In such circumstances money printing is pain-free. The sound-money advocates who normally criticize debt monetization are silenced by falling prices. Inflationists, meanwhile, love easy money and can always be counted on to cheer low interest rates and currency devaluation. So when fiat currency deflation becomes a possibility, it is always and everywhere met with a tidal wave of newly-created money, which eventually converts deflation into inflation.

This has been happening on a rolling basis around the world. When one country or currency bloc slows down its central bank opens the monetary spigot, interest rates plunge and the currency falls against its peers.

So here we are, with gold and government bonds costing about the same to own, but governments actively trying to lower the value of their bonds and bank accounts while gold is rising wherever trouble erupts.

The logical conclusion is that if gold and cash both cost the same to own, then maybe gold — which has held its value over millennia while every previous fiat currency has evaporated — is the better bet. In Switzerland, this is apparently already happening:

(Bloomberg) — Investors are buying more gold as an alternative to hold Swiss franc cash deposits, according Vontobel Holding AG, a Swiss bank and wealth manager.

“We keep noticing that gold is coming back into favor with investors,” Vontobel Chief Executive Officer Zeno Staub, 45, told reporters Wednesday after the Zurich-based company announced full-year earnings.

Concerns that Greece may abandon the euro and Ukraine may be headed for a wider conflict have spurred demand for haven assets. Gold has climbed 4.2 percent this year, even as the dollar strengthened on prospects of higher U.S. interest rates. Investors’ holdings in gold-backed funds are near the highest since October.

Vontobel boosted the proportion of gold in discretionary managed investments by 2 percent after the Swiss National Bank increased charges on banks that use it as a custodian for franc deposits, Staub said. The central bank introduced a 0.75 percent negative interest rate on some deposits as of Jan. 22.

One of the reasons we’ve all heard of George Soros is that back in 1992 he pulled off an epic financial coup by “breaking” the Bank of England. At the time the UK was trying to maintain a loose peg with the German Deutsche Mark, despite the fact that the two countries had very different rates of inflation (UK’s high, Germany’s low).

To Soros’ practiced eye, this imbalance was clearly unsustainable and would eventually force the UK to devalue its currency to reflect the fact that it was living beyond its means and printing way too many pounds. Soros placed a big bet against the pound and sat back while the fundamentals won out. When Britain gave in and devalued, Soros made a billion dollars and became a household name.

Ever since, currency traders have dreamed of such conjunctions of government mismanagement and central bank cluelessness, hoping for their own Soros-level killings. But during the past couple of decades such sure things have been rare because currencies have floated more or less freely, which prevented huge imbalances from building up.

Now, however, thanks to the mess that is the eurozone and several other countries’ ill-advised dollar pegs, the world is once again a target-rich environment for speculators. The Swiss, for instance, have been going a little crazy trying to decide whether and/or how to peg the franc to the euro. And China, which runs a loose peg to the dollar, is looking like it might have to adjust its thinking in the not too distant future.

But right now the juiciest target is Denmark. A generally well-run country, it finds itself on the wrong side of the currency war, with the European Central Bank actively devaluing the euro against which the Danish krone is pegged. Capital has been flowing into Danish bonds seeking the relative safety of low inflation and stable state finances, which is pushing up the value of the krone. Maintaining the peg thus requires the Danes to create a lot of new kroner and use them to buy euros.

A soaring supply of national currency is inherently inflationary and destabilizing, which is the opposite of “well-run”. So just as the Swiss did last year, the Danes are both promising to maintain the peg and stressing out over the cost of doing so. Now the speculators smell blood:

(Bloomberg) — Less than a week after Denmark resorted to its deepest rate cut ever amid historic currency interventions, forward rates suggest some traders and investors still aren’t convinced the central bank can save its euro peg.

SEB AB, the largest Nordic currency trader, says capital flows into AAA-rated Denmark forced the central bank to dump about $4.6 billion in kroner in the first three days of February alone, almost a third the record amount it sold in all of January. Nordea Bank AB, Scandinavia’s biggest lender, says Denmark will need to deliver another 25 basis-point cut to fight back demand for kroner, bringing the benchmark deposit rate to minus 1 percent.

“The pressure on the krone hasn’t eased yet,” Jens Naervig Pedersen, an economist at Danske Bank A/S in Copenhagen, said by phone. “We can see from the forward rates that the market views the current upward pressure on the krone as the greatest ever.”

Governor Lars Rohde addressed speculators last week in what he characterized as a verbal intervention to persuade them he won’t let the krone’s peg to the euro collapse. Such a scenario is “unthinkable” and the central bank will do “whatever it takes” to avoid it, he said after delivering a fourth rate cut in less than three weeks.

Denmark’s largest institutional investor, ATP, sent a clear message of trust in the peg the same day, revealing it hasn’t bothered to hedge its $110 billion in assets against the possibility that the nation’s currency regime might break.

Make no mistake, the Danes are the victims here. They’re behaving the way a country should behave, with an eye to long term stability. But the rest of the world — the eurozone in particular — is so indebted that its only choice is to inflate or die.

Which leaves solid countries like Denmark and Switzerland with a similar choice: inflate and throw decades of prudent management out the window, or watch their currencies soar against those of a profligate world, causing their export sectors to go extinct and their economies to slip into Depression.

The speculators, meanwhile, are not the villains in this story. They’re just pointing out the truth with their capital. And their honesty will be rewarded very soon.